Biased processing of accounting examples and its effect on practitioners' judgments

Accounting guidance often contains examples which provide practitioners with a description of a hypothetical transaction and its appropriate accounting treatment. Despite this potential to influence accounting judgments, our understanding of how practitioners use such examples when making these judgments is limited. Relying on psychology theory, I propose that practitioners must first assess the level of similarity between the transaction and the example. I predict that when doing this, practitioners unknowingly use a biased cognitive process where they overweight shared aspects between the transactions. Using an experiment, I confirm this prediction and show that this bias causes practitioners to systematically assess similarity between a transaction and example as too high. Results also show that this causes practitioners to consistently overestimate the likelihood that their transaction also qualifies for the same treatment as any example they are given. My study provides insights on how and why examples can systematically affect accounting judgments and has implications for both standard setters and practitioners.